As the finance ministry's consultations continue for the Union Budget, it must realise that sticking to the path of fiscal consolidation and reform is vitally necessary. And achieving that goal depends on re-energising government revenue. The biggest and most important change to the revenue side, of course, is not dependent on the Budget itself: It is the Goods and Services Tax, or GST, which has become a casualty of political deadlock. Finance Minister Arun Jaitley has indicated that he will bank on the support of the regional political parties to help him pass the GST legislation. Whether or not the GST Constitution amendment is passed in the Budget session, two things are clear: It will eventually be passed, since all parties accept it in principle, and that tax reform extends beyond the GST and cannot wait for it.

On the direct taxes front, for example, the finance minister in this year's Budget speech made the important and progressive announcement that the corporation tax rate would be reduced gradually by five percentage points to 25 per cent over the next four years, and that this would be accompanied by the closing off of the various exemptions that lead to companies paying less than the current 30 per cent. Unfortunately, that process was not begun this year, but it will presumably begin in the coming one. There is an urgent need for a road map for reducing the tax rates, accompanied as it should be with a timeline for phasing out exemptions. What is vitally important is that the reduction of exemptions go hand in hand with the reduction in the tax rate. Sequencing is important, otherwise, corporate lobbies will build up to retain exemptions even as the tax rate reduces. The political economy, as well as the economics, of the decision makes it of paramount importance that big loopholes allowing many companies to pay little or no tax are closed at the same time as the rate reduction process starts.Discussion on personal income taxes also focuses on exemptions. Suggestions have been floated that the income exemption limit be raised for taxpayers, perhaps to as much as Rs 5 lakh a year. There is little justification for this at this point in time. It is true that demand is weak at the moment. But, demand stimuli equivalent to tax cuts are in any case on their way - from the granting of the one rank, one pension demand, for example, and from the recommendations of the Seventh Central Pay Commission. On the other hand, it is an important goal of the government that the direct taxes base should not be allowed to shrink; after all, too few Indians pay direct taxes. Raising the exemption limit will in any case be regressive, since it will benefit those in the highest income brackets as well. If a pro-middle class step is considered politically feasible, then the reduction of the lowest tax rate should be considered - though the current tax rates have the virtue of simplicity and wide acceptance. It is important, in order to expand the tax base, to also ensure that more transactions are scrutinised, by making the use of PAN numbers compulsory. Recent relaxations in this requirement in some transactions were ill-advised.When it comes to service taxes, this is perhaps the government's last opportunity to get service taxpayers ready for the advent of the GST. In other words, the rate should be raised to closer to the expected revenue-neutral rate after the introduction of the GST, in order to cushion the immediate inflationary impact of the GST's adoption. The negative list of those exempted from paying service tax must be pruned, so that the benefits of universalisation of the GST are not lost. Finally, a clear statement about the end of "tax terrorism" and excessive demands for tax on transfer pricing transactions must be in the Budget, to reassure investors that India is turning more business-friendly.